Boston Scientific Corporation — Q1 2012 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2012, with balance-sheet comparisons to December 31, 2011. Boston Scientific develops, manufactures and sells medical devices globally. Results are unaudited; management cautions that the quarter is not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 or prior balance-sheet date |
|---|---|---|
| Net sales | $1.866 billion | $1.925 billion; down 3% reported and 3% constant currency |
| Gross profit / margin | $1.235 billion / 66.2% | $1.294 billion / 67.2% |
| Operating income / margin | $196 million / 10.5% | $322 million / 16.7% |
| Net income / diluted EPS | $113 million / $0.08 | $46 million / $0.03 |
| Management-adjusted net income / diluted EPS | $220 million / $0.15 | $336 million / $0.22 |
| Operating cash flow | $212 million | $(97) million |
| Cash and cash equivalents | $284 million | $267 million at December 31, 2011 |
| Total debt | $4.259 billion | $4.261 billion at December 31, 2011 |
| Working capital | $1.422 billion | — |
Interest expense was $69 million versus $75 million. Capital expenditures were $66 million. Cash used in financing was $129 million, including approximately $140 million spent to repurchase 23 million shares. The operating-cash-flow improvement primarily reflects approximately $300 million of litigation-related payments in Q1 2011. The prior-year investing inflow also included $1.416 billion of net proceeds from the Neurovascular divestiture.
Reported Q1 2012 results included $107 million of after-tax acquisition-, divestiture- and restructuring-related charges and amortization. The 2011 comparison included a $697 million goodwill impairment and a $530 million after-tax divestiture gain, among other items. Adjusted earnings are non-GAAP measures defined by management and should be considered alongside GAAP results.
Material changes and operating trends
- Cardiac Rhythm Management sales fell 10% to $501 million, with U.S. sales down 14%; management cited U.S. ICD-market contraction, lower procedures, pricing pressure and a slight reduction in estimated U.S. market share.
- Interventional Cardiology sales fell 5% to $603 million. Management cited competitive pricing and lower procedural volumes. The company estimated a 34% worldwide drug-eluting-stent share.
- Growth partially offset declines: Endoscopy rose 5% to $302 million; Peripheral Interventions rose 8% to $190 million; Neuromodulation rose 8% to $84 million. Urology/Women’s Health was flat at $120 million.
- Gross margin declined 1.0 percentage point. The comparison was affected by a $50 million Q1 2011 credit related to retroactive PROMUS supply pricing; current-period pricing pressure was partly offset by product mix, manufacturing savings and the launch of self-manufactured PROMUS Element stents.
- SG&A rose 11% to $659 million, reflecting investment in commercial resources and infrastructure, $26 million higher litigation-related expenses, and the absence of a prior-year $20 million Greek receivables allowance reversal. R&D increased 1% to $215 million.
- By geography, reported sales declined 4% in the U.S. and 7% in EMEA, while Japan rose 2% and Inter-Continental rose 10%; constant-currency changes differed, including EMEA down 3% and Japan down 2%.
Outlook, commentary and risks
- The filing provides no consolidated full-year revenue or earnings guidance. Management expects launches and investment in growth markets to support performance, but gives no quantified near-term sales forecast.
- Boston Scientific exercised its option to acquire Cameron Health. Closing was expected in Q2 or Q3 2012, subject to customary conditions and antitrust clearance. Consideration includes $150 million at closing, a potential $150 million upon FDA approval of the S-ICD system, and up to $1.05 billion in revenue-based milestone payments over six years after approval.
- The company expected its 2011 restructuring plan to be substantially complete by the end of 2013, with total pre-tax charges of $155 million–$210 million. It estimated $200 million–$250 million of gross annual operating-expense reductions when the 2010 plan is complete, with some savings to be reinvested. Plant-network optimization was expected to produce about $65 million of annualized manufacturing-cost reductions exiting 2012.
- In April 2012, the company replaced its revolving facility with a $2.0 billion facility maturing in 2017. At March 31, it was in compliance with covenants: leverage ratio 2.4x against a 3.5x maximum, and interest coverage 6.5x against a 3.0x minimum. Moody’s had upgraded the company to Baa3 in February; management said all three major agencies rated it investment grade.
- Liquidity risks include European sovereign-debt exposure: factoring capacity and receivables collection in southern Europe were under pressure. Net receivables in Italy, Spain, Greece and Portugal more than 180 days past due were $48 million at quarter-end. The company was pursuing alternative factoring arrangements.
- Legal and tax contingencies remain significant. Accrued legal reserves were $318 million. The IRS asserted $1.162 billion plus interest in disputed tax deficiencies; the company contests the assessment, and the ultimate outcome is uncertain. The filing also describes ongoing patent, product-liability and government-investigation matters, including more than 475 transvaginal-mesh product-liability cases or claims as of May 3, 2012.
- Goodwill impairment remains a risk: management identified four reporting units with material goodwill and elevated impairment sensitivity. The U.S. CRM unit’s carrying value continued to exceed fair value; no interim impairment test was required in Q1 2012.
- Other risks include competitive and reimbursement pressures, product performance and regulatory approvals, clinical-trial outcomes, foreign-exchange movements, and the 2.3% U.S. medical-device excise tax scheduled to begin in 2013.
Important facts for investors to verify
- Whether CRM and U.S. ICD procedure volumes, pricing and market share stabilize, and whether new defibrillator and pacemaker launches improve sales.
- Whether PROMUS Element conversion delivers the expected margin benefit as the Abbott supply arrangement ends in June 2012.
- Actual restructuring cash costs and savings versus management’s estimates, and the sustainability of operating cash flow after adjusting for prior-year litigation payments.
- Developments in southern European receivables, factoring access and collection risk; covenant headroom and debt maturities.
- Timing, regulatory progress and total potential cost of the Cameron Health acquisition, alongside other contingent consideration obligations.
- Developments in the IRS dispute, patent and product-liability cases, government investigations, and goodwill impairment assumptions.